Iran’s Euro Liquidation Offset by Rebound in Risk Appetite to Keep Gold Stable

North American Commodity Update

Commodities - Energy

A Surge in Risk Appetite Leaves Oil Traders Struggling to Keep Pace

Crude Oil (LS NYMEX) -  $73.45  //  $0.87   //  1.20%

With relatively little macro economic data to develop the supply / demand dynamic of energy market, crude was free to follow the lead set by the speculative crowd Wednesday. However, crude’s performance would draw a clear contrast to the robust health of equities – at least through the US session. Through the early trading hours of the Asian and European sessions, sentiment was largely mixed with most of the major equity indexes trading most in the red. Though this period, electronic trading of the United States’ standard WTI grade would maintain a narrow and choppy range of $1.25. With the open of the NYMEX and influx of US liquidity, however, a clear demand for risk would develop. A 3 percent intraday rally would develop for the active futures contract through the first half of the New York session; but progress would stop there. What’s more, the impressive rally for US shares through the close of exchange trading would not be copied by the electronic traders after the earlier close of the crude pits. This rebound would subsequently set a clear range of congestion for market participants to work with (between $75.50 and $71.50).

Part of the underperformance for US crude was the performance of the dollar. Despite the unfavorable winds that would be generated by a broad improvement in sentiment, the safe haven greenback would hold relatively stable through the session. The benchmark currency’s position has been fortified by its relatively strong economic performance as well as the considerable weakness in its benchmark counterpart: the euro. News today that Iran was starting to unload the European currency adds to speculation that deep-pocketed market participants are starting to withdrawal capital from the troubled region. Naturally, as the world’s preferred reserve currency and the most liquid counterpart to the euro, weakness in the share currency logically benefits the dollar. Yet, through it all, investor sentiment itself has not truly progressed in the past two months. High volatility has masked the lack of direction for growth and yield-linked assets. When a clear trend once again develops for the capital markets, correlations will tighten and crude will once again be swept up into the current.

From speculative factors to tangible economic factors, today’s macro docket was relatively light. In the Asian session, the first quarter GDP numbers from Australia would offer a demand update from one of the industrialized world’s best performing economies. However, crude traders are more interested in the demand from the largest petroleum importers and consumers. Form the US, data was light with a pending home sales report for April that would rouse little speculation on the broader health of the economy. Growth markers for Japan, the United Kingdom and Europe would have a harder time translating into trading points for the energy bloc. Setting up the US Department of Energy’s inventory figures for tomorrow, the American Petroleum Institute’s stockpile report for the period ending May 28th reflected a 1.42 million barrel drop in oil holdings and 962,000 barrel contraction in gas stores.

Commodities - Metals

Iran’s Euro Liquidation Offset by Rebound in Risk Appetite to Keep Gold Stable

Spot Gold -  $1,223.85  //  -$1.80  //  -0.15%

The back and forth in underlying risk appetite continues; but a clear direction from this high-level activity is still elusive. So, while US equity benchmarks would rally more than two percent through the end of Wednesday’s session; investor sentiment over the past two weeks has turned to neither a clear bullish or bearish conviction. This is part of the reason gold has been able to steadily advance through strong intraday declines in risk appetite. Furthering isolating this particular commodity from the volatile froth in speculative interests, the precious metal has enjoyed its status as an alternative to the market’s traditional safe haven assets, which are often considered the “risk free” components of portfolios. Leveraging this unique status Wednesday was the news that Iran was planning on selling 45 billion euros form its reserves and would replace the pained currency with dollars and gold. The first 15 billion euro sale reportedly had already taken place. While Iran is hardly the largest Sovereign holder of euros in the world, they can be ranked among the most reactive. If this nation is worried about the future of the shared currency, the pressure on the market can further depress its value and perhaps eventually lead to divestment from larger investors (like China). Another shake to confidence for traditional currency and government bonds was the news that Japan’s Prime Minister, Yukio Hatoyama, was resigning after only eight month in office. While this is likely a strategic move by the Democratic Party of Japan, it nonetheless throws political uncertainty into a mix of economic and financial trouble for the world’s second largest economy.

Spot Silver  -  $18.360   //  -$0.08  //  -0.43%

Despite the steady advance in US equities through today’s session, silver would not share the bullish sentiment that the more traditional speculative asset classes would see. In a session that would see a lower daily high and lower low (potentially curbing the metal’s feeble two week advance), silver found a greater correlation to the metal complex rather than investor favored assets. Looking at the base metals, aluminum, copper and lead would fall 2.6, 2.7 and 5.5 percent respectively. From the precious metals group, gold was lower on the day while platinum and palladium were both little changed.

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com